Cryptocurrency as solution of classical banking’s problems

Interview with Kamran Gasimov,Co-Founder and Development Director of Accounting and Tax Resources and Founder and Director of Richmond Group.

What is the reason of sharp increase in popularity of cryptocurrencies in recent years?

The emergence of cryptocurrencies can be explained by the crisis of classical banking. The high cost of banking loans and services, administrative and bureaucratic barriers in the establishment of interbank and other financial relationships, and excessive politicization and monopolization of the banking market are the primary manifestations of the global crisis. Furthermore, there is nocompetent international judicial body entrusted with resolving disputes over international bank transfers. The rise of Bitcoin is nothing more than a public protest against classical institutional systems: payment, legal, administrative, etc.

What are the problems that classical banking is facing today and how can the blockchain technology, which you plan to implement in Azerbaijan, help in solving these problems?

The most important issues for banking are transparency in banking operations, interbank relations and interbank workflow, risk management in making credit decisions, and the politics of banking interactions. Banking organizations have been repeatedly accused of having a role in the planning and implementation of terrorist attacks, money laundering, tax evasion, corruption schemes and other crimes. However, even law enforcement agencies incapable of obtaining the information they need to investigate a crime due to the legislation of many countries protecting data. Moreover, in case of banking sanctions, ordinary consumers often suffer more from such sanctions than do the very perpetrators of the crime.

In addition, political conflicts in many regions have prompted many politicians to demand the exclusion of certain countries or banking organizations from interbank services. Some experts consider such demands attempts to use international banking instruments as means of political pressure.

One more problem is that even major banks are at times guilty of misreporting their numbers in papers submitted to banking supervisors.

Translating bank statements into blockchain technologies will eliminate the need for paper forms and improve bank transparency. For banks’ clients, in turn, a “Single Bank” application, created using blockchain technologies, would enable to easily manage all multiple accounts. Furthermore, tax and regulatory authorities would also be able to audit an individual’s payment operations with such a “Single Bank” application. This application could also serve as a basis for assessing credit risks of the bank when making decisions on loans. In ordinary banking practice, the adoption of credit decisions requires the analysis of a large number of disparate documents – financial, legal, and other.

Do you consider cryptocurrencies as a safe currency both for a state and private investors?

Many states view excessive foreign investments as a form of attack on their sovereignty because a bank may simply be a proxy for powerful individuals or organizations: for example, the bank’s shareholders, the foreign government, international organizations of which the bank is a member, etc. Unlike foreign currencies and foreign credit organizations that have a central issuing body, cryptocurrencies do not generally have a single point of generation. Therefore, it is impossible to identify a particular beneficiary whose interests oppose the interests of other users of the system. Other advantages of cryptocurrencies are inability to withdraw most of the funds from the system for fraudulent purposes and low transaction costs. Moreover, blockchain technology prevents individuals from being singled out and targeted. It is difficult to impose sanctions against individuals and nearly impossible to effect systemic legal or political change.

In addition, unlike classical banking where all records in electronic form can only be transferred as a copy, blockchain technologies provides only one model for interpreting the facts. Thus, the asset cannot be used twice.

Blockchain also reduce high transaction costs of modern banking capital related to the necessity for thorough auditing to ensure that transactions are correct. The register of transactions in blockchain is repeatedly verified through the distribution of transaction processing amongst all market participants.

However, account administration is a weakness of blockchain technologies. It is the only component of the technology that should be regulated by governmental authorities. Until appropriate regulation is successfully implemented, a good solution could be to implement a system of state licensure for the creation of software that serves electronic purses.

What are smart contracts and what are their advantages and disadvantages?

A smart contract is a self-executing contract in an electronic format secured by cryptographic protocols. The self-executing nature of a smart contract is implemented when the specified circumstances occur, such as the certain period of time is expired, the parties to the contract perform certain actions, certain events occur, deliverables are met, and other circumstances.

Smart contracts establish unified rules for interpreting and executing a contract when it is being executed in several jurisdictions since the contract is based on a computerized language. Moreover, such kind of contracts minimize the costs of legal services because if the parties violate the terms of the contract, the contract is subject to automatic arbitration and enforcement. In addition, smart contracts ensure minimal workflow, and inability to falsify documents upon which depends the validity and the fulfilment of the contract.

However, the legal community has not yet determined the ways of interaction between controlling bodies of a particular state and a system mediated by smart-contracts. Moreover, smart contracts are not very adaptive to changing circumstances and it is difficult to return to the initial position if fraud or other unlawful actions are committed by one of the parties.

Could transactions and profits in cryptocurrencies be taxed in future?

Of course. However, there are disagreements how to treat cryptocurrency for tax purposes – as foreign currency or other means of payment; as property; as investment; or tax only income and profit in cryptocurrencies.

I see reasonable to tax profits generated by transactions with cryptocurrencies and not cryptocurrency itself as an asset, since this stance most consistently corresponds to its high volatility.

In this regard, the position of the European Court from 2015 on the taxation of Bitcoins is extremely consistent. It found that the cryptocurrency Bitcoin has no other purpose except as a means of payment, and it is not material property. Therefore, operations for the purchase, sale and exchange of Bitcoins are exempt from value added tax in any member state of the EU.

You are working on creation of the first cryptocurrency exchange in Azerbaijan. Why does the country need it?

There are several thousand kinds of cryptocurrencies with varying economic potential, liquidity and reputation. The only way to ensure their free flowing is to implement a cryptocurrency exchange. It is an instrument which assists in the issuance of the cryptocurrency, its initial offer to an unlimited number of persons, as well as exchange, purchase and sale transactions. Furthermore, the cryptocurrency exchange could serve as a crowd funding platform for raising investments in the form of cryptocurrency loans for business and charitable projects. Banks seem to be the most reliable platform for the organization of stock exchanges of crypto-currencies. They have the relevant infrastructure, are tightly regulated by the state, and have the necessary resources to analyse the financial risks of admission of a currency to organized marketplaces.

How much is the blockchain system protected against falsification and fraud?

A blockchain is a decentralized database based on cryptographic algorithms consisting of many synchronized copies that are stored in autonomous locations. As soon as a transaction is made, information about it is redirected to all other ledgers that are synchronized with each other. Thus, when a particular ledger is hacked, the database itself remains unchanged, which means that the reliability of the information is guaranteed.

What is very important, blockchain technology is not limited to the financial sector. It can be used in any electronic database which accumulates information about individuals’ activities. For instance, voting systems, tracking the use of digital content, title registration of real estate and of personal property, transportation of goods, and etc.